Tuesday, June 22, 2010

Currency Trading News Dollar Advances for a Third Day

  • Dollar Advances for a Third Day as the Focus Shifts from the Yuan Peg back to European Finances
  • Euro Troubled by Suggestions, Evidence that Regional Financial Conditions Deteriorating
  • British Pound Posts an Uneasy Advance on Government’s Ambitious Budget Efforts
  • Canadian Dollar Slips as Interest Rate Expectations Plunge following BoC Comments, CPI Data
  • Japanese Yen Tentatively Advances on Government’s Murky Budget Promises
Dollar Advances for a Third Day as the Focus Shifts from the Yuan Peg back to European Finances
The pictures between the benchmark US equities indexes and the performance of the US dollar may seem to deviate on underlying sentiment; but in fact they are the same. While the pace and volatility between the two may have diverged somewhat last week; the expected bearing given underlying risk appetite trends has held firm. Today, both momentum and direction would develop in tandem to push risk appetite lower and subsequently send the greenback to its third consecutive daily advance. For confirmation that this was indeed partly due to investor sentiment levels, the S&P 500 put in for a 1.6 percent decline of its own – the biggest down day for the index since June 4th. Where was this encouragement for shifting capital to relative safe havens coming from? A number of sources. Stealing financial headlines the world over; both the United Kingdom and Japan released budgets aimed at taming bloated deficits. The details on Japan’s effort were absent, though the objective was certainly ambitious. Alternatively, the UK’s attempt was far more specific; and bolstered hope that the region can control its unwieldy position and protect its top sovereign credit rating. This may seem a straightforward effort; but the effect on investor sentiment is more complicated. First of all this reminds investors of the difficult financial positions the world’s largest economies are in. And, in this capacity, it reminds us that some global players have postponed tightening the purse strings (the US being prominent in this group). At the same time, it rouses debate over what is the proper mix of budget restraint and economic support. There is no right answer and no single solution for all economies; but the market at large will speculate on this situation regardless.

Another jolt to investor confidence came from a round of reports and headlines from the European markets. There is little doubt that the financial health of the European Union is still top concern for global investors. This ensures a level of sensitivity to the warning issued by the ECB’s Noyer that banks in the region are facing funding problems at the same time that BNP Paribas is downgraded by Fitch. With the yield on financially strapped EU nation government debt (Greek and Spanish) increasing over more stable counterparts (German bunds), there was clearly a concern over the health of global finances going forward. Alternatively, US policy officials seem to still be holding the line on positive commentary. Treasury Secretary Timothy Geithner said in his testimony before the TARP Oversight Panel today that the credit market was opening up and companies were building reserves. This suggests that lending will help, not hinder economic activity; and US banks were better protecting themselves from future market shocks.
For data on the day, the focus was almost exclusively on the housing markets. The National Association of Realtors’ existing home sales data for May unexpectedly contracted 2.2 percent for the month to a 5.66 million pace of annual turnover. This was a modest disappointment given the market consensus for an improvement; but overall, the moderation in the period-to-period fluctuations was certainly an improvement. With a government tax credit set to expire, it is important to monitor overall trend rather than monthly performance. For tomorrow, the docket is once again newsworthy. New home sales are worth marking; but it is the FOMC rate decision that holds the greater potential. No change in the Fed Funds rate is expected; but the group could very well update growth and inflation expectations. What’s more, there is a good chance that commentary could shift or extraordinary policy efforts could be altered. If that is the case, it could be seen as step towards tightening.
Euro Troubled by Suggestions, Evidence that Regional Financial Conditions Deteriorating
With underlying sentiment slipping, the euro would lose ground Tuesday. Over the past few weeks, the shared currency has found strength not in a promising shift in economic and financial conditions for the Euro-area specifically; but rather an absence of new problems along with a general rebound in investors’ confidence. Further capitalizing on the drop in optimism, bearish momentum developed along with updates that undermined the perception that the region could support a financial recovery. Top news was ECB Noyer’s comment that private European banks were encountering funding problems (a discouraging development considering one of his colleagues recently suggested the central bank would not provide liquidity to individual banks) and the timely downgrade for BNP. Further depressing confidence, Standard & Poor’s warned that more Spanish real-estate developers were likely to fail, leading to a greater overall level of defaults and higher lending cost. Data, on the other hand, made an effort to even out pessimism. The Euro Zone consumer confidence report improved slightly for June while the German IFO business sentiment survey rose to its highest level in over two years. Tomorrow’s June activity reports for the factory and service sector could help bolster growth expectations for the second quarter as these numbers usually perform rather closely to the performance of the broader economy.

British Pound Posts an Uneasy Advance on Government’s Ambitious Budget Efforts
There was a lot of potential in the UK’s budget announcement. The sterling had moved very little in the weeks preceding the announcement and Fitch’s warning last week that the government had to do more to preserve the nation’s top sovereign credit rating further focused the market’s attention. However, the ultimate reaction was relatively tame. The pound would, however, climb on the combined effort to raise sales and capital gains taxes, lower corporate profit tax, freeze public wages and child subsidies, and raise a levy on banks. The government expects spending to be cut by 30 billion pounds a year; but what will the effect be on growth? How effective will these cuts be? Only time will tell.

Canadian Dollar Slips as Interest Rate Expectations Plunge following BoC Comments, CPI Data
The Canadian dollar is rapidly losing its appeal as a currency that leads through growth and interest rate expectations.
Following up the dour commentary after the last BoC rate hike, the central bank further bolstered its warnings of financial uncertainty going forward. Today, the May CPI reading dropped well below target to a 1.4 percent clip. The market now expects only 88 bps of hikes over the coming year.

Japanese Yen Tentatively Advances on Government’s Murky Budget Promises 
If Japanese officials were trying to rouse the same level of confidence from the markets as the UK was looking for on its budget report, they have certainly fallen short. Prime Minister Kan laid out a goal to balance the nation’s massive deficit by 2021. However, critically absent were the details of how this would be accomplished. Credit ratings agencies will not simply take them for their word. Neither will the market.

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